Federal retreat on big mortgages may hurt
upscale housing

By David Streitfeld

New York Times

MONTEREY — By summer’s end, buyers and sellers in some of the
country’s most upscale housing markets are slated to lose their biggest
benefactor of the economic downturn: the deep pockets of the federal government.
In this seaside community of pricey homes, the dread of yet another housing
shock is already spreading.

“We’re looking at more price drops, more foreclosures,” said Rick Del Pozzo,
a loan broker. “This snowball that’s been rolling downhill is going to pick up
some speed.”

For the past three years, federal agencies have backed new mortgages as large
as $729,750 in desirable neighborhoods in high-cost states like California, New
York, New Jersey, Connecticut and Massachusetts. Without the government covering
the risk of default, many lenders would have refused to make the loans. With the
economy in free fall, Congress broadened its traditionally generous support of
housing to an unprecedented degree.

But Democrats and Republicans agree that the taxpayer should no longer be
responsible for homes valued well above the national average and are about to
turn a top slice of the housing market into a testing ground for whether the
private mortgage market can once again go it alone. Michael Barr, a former
assistant Treasury secretary, said the federal government’s retrenchment would
be painful for many communities.

“There’s always going to be a line, and for the person just over it, it’s
always going to be an arbitrary line,”

said Barr, who teaches at the University of Michigan Law School. “But
there is no entitlement to living in a home that costs $750,000.”

As the housing market braces for the trouble, homeowners everywhere have been
reduced to hoping things will some day stop getting worse. In some areas,
foreclosures are the only thing selling. New-home construction is nearly
nonexistent. And CoreLogic, a data company, said Tuesday that house prices fell
7.5 percent over the past year. Each month, the number of faltering cities
rises.

Federal agencies last year backed nine out of 10 new mortgages nationwide,
and losses from soured loans are still mounting. Fannie Mae, which buys
mortgages from lenders and packages them for investors, said last week that it
needed an additional $6.2 billion in aid, bringing the cost of its rescue to
nearly $100 billion.

Getting the government out of the mortgage business, however, is proving much
more difficult than doling out new benefits. As regulators prepare to drop the
level at which they will guarantee loans — here in Monterey County, the level
will drop by a third, to $483,000 — buyers and sellers are wondering why they
should be punished simply for living in an expensive region. Sellers worry that
the pool of potential buyers will shrink. “I’m glad to see they’re trying to
rein in Fannie Mae, but I think I’m being disproportionately penalized,” said
Rayn Random, who is trying to sell her house in the hills for $849,000 so she
can move to Florida.

The National Association of Realtors is making an extension of the loan
guarantees a top lobbying priority.

“Reducing the limits will put more downward pressure on prices,” said
president Ron Phipps. “I just don’t think it makes a lot of sense.” But he said
that in contrast to last year, when a one-year extension of the higher limits
sailed through Congress, “there’s more resistance.”

Federal regulators acknowledge that mortgages will get more expensive in
upscale neighborhoods but say the effect of the smaller guarantees on the
overall housing market will be muted.